Transitions in Segmented Labor Markets The Case of Brazil G Ö T T I N G E R S T U D I E N Z U R E N T W I C K L U N G S Ö KO N O M I K / G Ö T T I N G E N S T U D I E S I N D E V E L O P M E N T E C O N O M I C S Silke Woltermann Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access When labor market economists started to work on segmented labor markets, they classified informal employment as a transitory state. At the end of the 20<sup>th</ sup> century, informal employment still persists governments’ attempts to eradicate it and represents a growing labor market segment not only in developing countries but worldwide. It is evident that informal employment will not disappear but has to be taken into account when designing labor market policies. This study investigates the role of informal dependent employment on the allocation of workers into formal employment in general and on the choice of job search channels in particular. The empirical analysis is based on Cox proportional hazard models and multinomial logistic regression, using Brazilian labor market panel data. Silke Woltermann was born in Köln in 1969. She studied economics and political sciences at the University of Göttingen. As a Ph.D. student, she was a research fellow at the University of Göttingen and at the Institute of Applied Economic Research, IPEA, in Brazil. Now, she works for an international cooperation enterprise for sustainable development. G Ö T T I N G E R S T U D I E N Z U R E N T W I C K L U N G S Ö KO N O M I K / G Ö T T I N G E N S T U D I E S I N D E V E L O P M E N T E C O N O M I C S Silke Woltermann Transitions in Segmented Labor Markets Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access Transitions in Segmented Labor Markets Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access Gettinger Studien zur Entwicklungsokonomik Gottingen Studies in Development Economics Herausgegeben von/ Edited by Hermann Sautter Band 14 £ PETER LANG Frankfurt am Main · Berlin · Bern · Bruxelles· New York· Oxford · Wien Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access Silke Woltermann Transitions in Segmented Labor Markets The Case of Brazil £ PETER LANG Europaischer Verlag der Wissenschaften Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access Open Access: The online version of this publication is published on www.peterlang.com and www.econstor.eu under the interna- tional Creative Commons License CC-BY 4.0. Learn more on how you can use and share this work: http://creativecommons. org/licenses/by/4.0. This book is available Open Access thanks to the kind support of ZBW – Leibniz-Informationszentrum Wirtschaft. ISBN 978-3-631-75370-5 (eBook) Bibliographic Information published by Die Deutsche Blbliothek Die Deutsche Bibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data is available in the internet at <http://dnb.ddb.de>. :f Zugl.: Gottingen, Univ., Diss., 2004 Gratefully acknowledging the support of the lbero-America-lnstitut for Economic Research at the University of Gottingen. D7 ISSN 1439-3395 ISBN 3-631-53162-1 US-ISBN 0-8204-7380-4 © Peter Lang GmbH Europa.ischer Verlag der Wissenschaften Frankfurt am Main 2004 All rights reserved. All parts of this publication are protected by copyright. Any utilisation outside the strict limits of the copyright law, without the permission of the publisher, is forbidden and liable to prosecution. This applies in particular to reproductions, translations, microfilming, and storage and processing in electronic retrieval systems. Printed in Germany 1 2 3 4 6 7 www.peterlang.de Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access Editor's Preface Informal labor relations are widespread in labor markets of developing coun- tries. But they are also increasing in the industrialized world, as global eco- nomic interaction increases and wage rates are exposed to international com- petition. Comparable to temporary work or part-time work, informal em- ployment is often regarded as an inferior labor relation. In this thesis, the author uses Brazilian labor market data to show that informal employment in Brazil has more dimensions and cannot be regarded solely as an unfavorable occupational relationship. The author takes two approaches to investigate the effects of informal em- ployment on the development of Brazilian workers' labor histories. In a first approach, it is shown that informal employment, in spite of its negative repu- tation, has a positive impact on labor allocation into formal employment. For many professions in Brazil, there exist no vocational training courses and most of the learning in these professions is learning-by-doing in informal work rela- tions. Employers as well as employees may gain from the informal contract: Workers may acquire skills and experience, enhancing their chances to enter formal employment. Employers pay lower wages to workers with unknown skills and productivity and so decrease the possible costs that are involved in the risk of hiring a worker with low productivity. To test the hypothesis that informal occupation serves as a stepping stone to formal employment for some groups of workers, transition rates into formality are estimated for workers with different labor market histories. The estimation results show indeed that infor- mal employment increases the chances to enter formality for women searching on-the-job and for unemployed males who exited informal employment. In a second approach, the author takes a closer look at the search process itself. Unlike the heavily studied effects of unemployment insurance benefits and qualification programs on the job search process, the importance of job search methods has only recently attracted more attention. A special focus of this thesis lies on the impact of search methods on exit rates into formal employment. It is argued that vacancies in different labor market sectors (for- mal/ informal) are promoted via different channels and that part of the labor Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access 6 EDITOR'S PREFACE market segmentation originates from lack of information on vacancies in the formal sector. Some search methods are more effective to find a job in the for- mal sector; other channels will rather lead to self-employment. This assump- tion implies that labor market policies can model labor market transitions by designing customized job-matching programs. Job placement or job matching could improve labor search processes by facilitating access to labor market in- formation that otherwise may be hard to obtain for unemployed workers. To design an efficient job-placement service, a careful analysis of possible focus groups is essential to maximize efficiency. The design of public job placement assistance might improve the individual welfare by promoting search methods shifting more workers into formal employment. To obtain more information about the search process, first, the influence of an individual's labor history on the choice of search methods is tested. Second, the effect of different search methods on transitions into formal employment is investigated. The results reveal that individuals reporting to have contacted the public job-placement agency tend to transit into informal employment. This indicates that the design of the public employment service has potential for improvement. In a world where precarious work relationships appear with increasing fre- quency and are seemingly robust to all attempts to eradicate them, it is impor- tant to analyze their effects to be able to formulate appropriate labor market policies. By shedding light on the positive impacts of informal employment on the labor histories of less skilled workers the author provides a differentiated and valuable angle of view on the role of informal employment. Gottingen, June 2004 Prof. Dr. Hermann Sautter Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access Author's Preface Writing a thesis is something strange. Before you start, you already know what will happen. At least, you think you know. About the trial and error phase to define the subject of research. All the ups and downs your colleagues already told you about. And you think that now you know about all this, it couldn't possibly be that bad anymore. But then you experience that it does not matter if you know, it will happen all the same. All the loops you do while assuming and hoping that the things you try do not end in a loop. The downs you knew that would appear still leave you there. So why doing all this, anyway? Well, there are these moments when something works out (and this something that worked out may be increasingly small as time goes on) that leave you feeling really good. When you meet great people you would never have met in other circumstances and when you see your project grow ... Writing this preface makes me remember all the circumstances and chances that came along, and all the people involved who contributed each in his or her own way and without whom I would never have been able to finish this project. My first thanks go to my supervisor Prof. Hermann Sautter for accepting me as a doctoral student and leaving me so much freedom in the choice of my subject! O.K., he did not let me do my project on India, but once Brazil had been settled we arranged well! Prof. Walter Zucchini accompanied most of the econometric part of the thesis (all remaining errors and flaws are entirely mine) and was always there to most patiently discuss all my urgent questions. Prof. Stephan Klasen provided a working contract, lot's of helpful comments and a reduced workload just when I needed it most. And I am glad the members of his chair endured me during the final phase of the thesis and made me have a good time in Gottingen until the end! Special thanks go to all the great people who just integrated me during my stay at IPEA in Rio de Janeiro, especially to Kiko Corseuil, Daniel dos Santos and Prof. Eduardo Pontual Ribeiro! They not only let me have a good time full of scientific input and great discussions about life, Brasil{!) and Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access 8 AUTHOR'S PREFACE everything but became great friends who made me love Brazil, like Dani and Bruno Milanez and Alexandre Kappaun and his family and so many more. Special thanks to Daniel dos Santos who ignited the first sparks of inspiration for a new direction of research over some beers in lpanema! The major part of research in Brazil has been financed by a DAAD Research Grant which is gratefully acknowledged. At the economics department in Gottingen, Tim Krieger and Prof. Andreas Hauffler literally pushed me to write my first paper and to apply for IZA- Summer School. My colleague and friend Kai Stukenbrock was always there, not only for invaluable OOE;X support (kept up until the writing of this preface) but also for taking the edge out of all the other peculiarities of working at the department. Andreas Stadie, Analia Schlosser, Marloes Zijl and Marcelo Pessoa never tired to discuss lots of econometrics and provided even more mental support! I met Ken Harttgen at the department and over time he grew to be a very special friend who gave me lots of back up until the end (not only while climbing!). None of my friends has been around for a longer time than Anke Scholz. She simply knows what is going on and knows about it all and is just there whatever happens even living somewhere else for most of the time. And this is just good to know. I am grateful to Uta and Redelf, not only for the many cooked meals and all the 100% non-economic diversion, and to Leo for almost unconditional warmth and tons of cat hair. The kids' clowns and the jugglers gladly managed to take my thoughts off the thesis and put my small problems into perspective. Special thanks to Gert Liebenehm for helping out in a very difficult situation. A big thank you to all the other people who somehow helped me directly or indirectly to finish my thesis but who have not been mentioned here! But most probably nothing of this would have been without my parents who gave me lots of freedom and trusted in me, even if I did not always recognized it at first glance. Thanks to them and to my sisters Jana Marie and Miriam for just being one crazy family! Silke Woltermann Gottingen, June 2004 Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access Contents List of Figures 15 List of Tables 17 List of Abbreviations 19 I Informal Employment Revisited Theoretical Concepts and Stylized Facts From Brazil 21 1 Introduction 23 2 Theoretical Concepts 29 2.1 Informal Work in the Labor Theory . 29 2.2 Neoclassical Labor Market Theory . . 31 2.2 .1 The Basic Neoclassical Labor Market Model 2.2.2 Neoclassical Approaches to Segmentation . 2.3 Dual Labor Market Theory 2.3.1 The Basic Ideas . . . 2.3.2 Concepts of Segmentation 2.3.3 Unemployment in Segmented Labor Markets . 2.4 Some Empirical Evidence . . . . . . . . . . . . . . . . 31 35 45 45 47 50 51 Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access 10 CONTENTS 3 The Brazilian Labor Market 55 3.1 The Brazilian Labor Market in the Last Two Decades . 55 3.2 The Institutional Background . . . . . . . . 57 3.3 Informal Employment and Self-Employment 59 3.4 Wages and Labor-Related Costs 60 3.5 Unemployment . . . . . . . . . 62 3.6 Job Rotation and Labor Market Flexibility . 63 3.7 Labor Market Policies . . . . . . . . 66 3.7.1 Active Labor Market Policies 3. 7.2 Passive Labor Market Policies 4 The Database II The Allocative Power of Informality 5 Introduction 5.1 Motivation and Aim of Part II . 5.2 Labor Market Stepping Stones in the Literature 5.3 The Data . . . . . . . . . . . . . . . . . . . . . 6 Education and Transitions in Brazil 6.1 Professional Education and Training 6.1.1 Basic Education . .... .. 6.1.2 Vocational Training and Professional Education 66 67 71 73 75 75 78 79 81 81 81 82 6.2 Labor History and Transitions . . . . . . . . . . . . . . 83 Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access CONTENTS 11 7 Theoretical Aspects 87 7.1 The Human Capital Approach to Labor Market Transitions 87 7.2 Transitions in the Dual Labor Market Theory 89 7.3 Parameters and Hypotheses .. .. 91 7.3.1 Duration of Unemployment 91 7.3.2 Spell in the Last Job 92 7.3.3 Type of Last Job 92 7.3.4 Education 93 7.3.5 Sex . 94 7.3.6 Age 94 7.3.7 Position in the Household 95 7.3.8 Per Capita Household Income 96 7.4 Conclusion on the Theoretical Determinants 96 8 Analysis of Inter-Segment-Transitions 99 8.1 Dependent and Explanatory Variables 99 8.2 The Econometric Modelling ... .. 101 8.2.1 Modelling Stepping Stone Transitions in the Literature 101 8.2.2 Survival Data Analysis 9 Interpretation of the Results 9.1 Transitions of Employed Workers 9.2 Transitions From Unemployment 9.3 Estimations for Each Occupational Subgroup . 10 Conclusion . 102 109 109 . 112 . 114 119 Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access 12 CONTENTS III Job Search in a Segmented Labor Market 123 11 Introduction 11.l Motivation and Aim of Part III 11.2 Search Methods in the Literature 11.3 The Data ... . . . . . . ... 12 Job Search and Labor Market Policies 12.l Search Channels ... 12.2 Labor Market Policies 12.2.l Active Labor Market Policies 12.2.2 Passive Labor Market Policies 13 Theoretical Aspects 13.1 Search Theory - a Basic Model 13.2 Extensions of the Model . . . . 13.2.1 The Choice of Different Search Channels 13.2.2 Exit Into Different Labor Market Segments . 13.3 A Model for Brazil . . . . . . . . . . . . . . . . . . 14 Econometric Analysis 14.1 A Multinomial Logistic Regression Model . 14.2 Interpreting Multinomial Logistic Regressions 15 Estimation results 15.1 Labor History and Search Methods 15.1.1 Former Occupational State 15.1.2 Unemployment Insurance Benefits . 125 . 125 . 127 . 132 135 . 135 . 138 . 138 . 143 145 . 145 . 150 . 150 . 152 . 153 157 . 157 . 159 163 . 163 . 163 171 Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access CONTENTS 13 15 1.3 Sex, Age, Position in the Household and Per Capita Household Income 172 15 .1.4 Education .. ... 15.2 The Impact of the Choice of Search Methods . 15.2 .1 Search Methods .. ... ... . . 15 .2.2 Unemployment Insurance Benefits . 173 175 175 181 15 .2.3 Personal Characteristics and Duration of Unemployment 182 15.2.4 Education 185 16 Conclusion 189 A Description of the Data Used in Part II 193 B Description of the Data Used in Part III 195 C More Estimation Results for Part III 197 Bibliography 220 Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access List of Figures 2.1 Neoclassic demand and supply in the labor market. 33 2.2 Unemployment in the neoclassic labor market. 34 2.3 Worker's effort level as a function of the wage. 39 2.4 Labor demand curve LD in the efficiency wage framework. 40 3.1 Employment proportions of the labor force in Brazil, 1982-2000. 56 3.2 Unemployment rate in Brazil, 1982-2000. 57 3.3 Labor market segments in Brazil. . . . . 60 3.4 Monthly wages in Brazil 1999 in multiples of minimum wages. 61 3.5 Open unemployment rates in Brazil, 1997 - 2001, split up by sex. 63 3.6 Open unemployment rates total and by sex in 1999 64 9.1 Transition rates into formal employment ... . 117 15 .1 Odds ratio plots for the type of previous job . . 166 15 .2 Odds ratio plots for the type of previous job: former informally employed (uwork2), newcomer (uwork3), self employed (uwork4) . 168 15 .3 Discrete change plots for former occupational states and other selected covariates. . . . . . . . . . . . . . . . . . . . . . . . . . 170 15.4 Odds ratio plots for sex (sexo) , head of household (chefe) and age (idade). . . . . . . . . . . . . . . . . . . . . 172 15.5 Odds ratio plots for different levels of education .. .... . . . . 174 Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access 16 LIST OF FIGURES 15.6 Discrete change plots for educational levels and per capita house- hold income. . . . . . . . . . . . . . . . . . . . 175 15 .7 Odds ratio plots for different search channels. 15 .8 Discrete change plots for different search channels .. 179 181 15 .9 Odds ratio plots for the duration of unemployment and personal characteristics. . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 15.l0Discrete change plots for the duration of unemployment and personal characteristics. . . . . . . . . . . . . . 185 15.llOdds ratio plots for different educational levels. 15 .12Discrete change plots for different educational levels. C.l Odds ratio plots with discrete change for the type of previ- ous job: former formally employed, former informally employed, 186 186 newcomer .. .... .. . . .... ... ... .. . . . . ... 197 C.2 Odds ratio plots with discrete change for the type of previous job former informally employed, newcomer, self employed. 202 C.3 Odds ratio plots for sex, head of household and age. . . . . 202 C.4 Odds ratio plots with discrete change for different levels of ed- ucation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 C.5 Odds ratio plots with discrete change for different search channels. 204 C.6 Odds ratio plots with discrete change for the duration of unem- ployment and personal characteristics. . . . . . . . . . . . . . . 205 C.7 Odds ratio plots with discrete change for different educational levels. .. .... .. .. .. .. ... . . . . .. ... . . 206 Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access List of Tables 6.1 Cross tabulation of labor market transitions for all states . . . . 84 6.2 Cross tabulation oflabor market transitions of unemployed work- ers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 7.1 Expected impact of the covariates on the probabilities of tran- sition into formality . . . . . . . . . . . . . . . . . . . . . . . . 97 9.1 Hazard ratios for on-the-job transitions into formality 111 9.2 Hazard rate contributions for transitions from unemployment to formal employment .... .. . . . . . .. .. . . . . . . . 113 9.3 Hazard rate contributions for different former occupational statesll5 11.1 Empirical studies on the effects of job search Methods . . . . . . 131 12.1 Cross tabulation of former labor market state and search method chosen .... ...... . . .. ....... ... . . . ... 137 12.2 Numbers and performance indicators of SINE activities for the year 2000 .. .. ..... .. . . . . .. ... .. ... 141 12 .3 Brazilian unemployment insurance benefits: requests and cov- erage for the years 1998 -2002 ..... .. .. . . .. .... 144 15.1 Odds ratios for the choice of search methods 15 .2 Estimation results for the choice of search methods - only former occupational states with the group of former formally employed 164 as a base category . .. . . .. ... ..... .. . . .... . . 167 Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access 18 LIST OF TABLES 15.3 Discrete changes for the choice of search methods . . . . . . . . 169 15.4 Odds ratios of the impact of benefit payments on the choice of search methods . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 15.5 Odds ratios for the labor market transitions depending on the choice of search methods . . . . . . . . . . . . . . . . . . . . . . 176 15 .6 Discrete changes for the labor market transitions depending on the choice of search methods . . . . . . . . . . . . . . . . . . . . 180 15. 7 Odds ratios of the impact of benefit payments on the transition into employment . . . . . . . . . . . . . . . . . . . . . . . . . . 182 A. l Covariates used in the estimation in chapter 8 193 A.2 List of professions and proportions of formal and informal em- ployment (in%) used in the estimation in Chapter 8 194 B.l Cross tabulation of sex and former labor market state . 195 B.2 Covariates used in the estimations in Chapter 14. . . . 196 C.l Odds ratios of the impact of benefit payments on the choice of search methods . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 C.2 Discrete changes of the impact of benefit payments on the choice of search methods . . . . . . . . . . . . . . . . . . . . . . . . . . 199 C.3 Odds ratios of the impact of benefit payments on the transition into employment . . . . . . . . . . . . . . . . . . . . . . . . . . 200 C.4 Discrete changes of the impact of benefit payments on the tran- sition into employment . . . . . . . . . . . . . . . . . . . . . . . 201 Silke Woltermann - 978-3-631-75370-5 Downloaded from PubFactory at 01/11/2019 05:48:37AM via free access